The Cost of Your Dream Car

My dream car when I was a teenager was a MGB GT. A classic sports car from the 1960’s and 1970’s by the British car maker MG. The car was designed by the famous Italian car designer Pininfarina, who has designed cars for Ferrari, Maserati and Alfa Romero, to name a few. In 2019, the American car magazine Road & Track named the MGB GT one of the "16 of Pininfarina's Most Beautiful Designs That Aren't Ferraris”.

It is a beautiful car and there was someone who lived on my drive to school who owned one. And every day that I drove past it, I looked longingly at it. I’m sure there are lots of guys (and perhaps some girls) who have had that feeling as well.

Eventually when I got my first real job, at the tender age of 29 (I was a student for way too long!) I bought a navy blue 1972 MGB GT for about R 50,000 in today’s terms off eBay!

At the time, I didn’t really think about whether it was a good decision. I just knew that I wanted it and I made it happen. In some ways, I was proud of myself for making a 15-year-old dream come true.

However, now that I’m a little older and a little wiser, I’ve often wondered if my ambitions had not been constrained by my humble academic salary and had my eye been on a BMW Z4 instead, which would have cost me close to a million, would I have had the strength to resist buying my dream car. I’m not so sure.

So for Youth Day, I want to take the time to evaluate the impact of buying the car of your dreams can have on your future ambitions.

Let’s start with the assumption that transport is a utility. We need to get from points A to B for work, for school and for enjoyment. And it doesn’t really matter how we get there. It’s unsurprising that Hong Kong, which has one of the most efficient and well developed metro networks, has car ownership rates of only 0.1%, compared to the USA, which has 80% and arguably one of the worst public transport systems for a developed economy.

For the purposes of this thought experiment let’s say you’re 21 years old, you’ve just graduated and got your first job and your dream car is the new VW T-Cross, which retails for about R 500,000. On the other hand, imagine that you can get your hands on a well maintained 2007 VW golf for R 75,000. It’s not glamorous but it’s reliable and has many more years of service to offer.

Let’s consider the impact of two scenarios, either you buy the car of your dreams or you buy the more practical second-hand car.

Because your dream car is so expensive you have to apply for car financing from your bank, but as a new graduate you’re unlikely to get an interest rate less than 13%, so assuming you can get a loan over a 72 month period, you’re looking at a total cost of purchase of about R 730,000 with monthly installments of R10,000!

Now let’s imagine that instead of rushing headlong into buying your dream car, you decide to save that R 10,000 for the first 6 months of work and cash in your student savings of R 15,000 and buy the VW golf for cash and you keep on saving and investing the R 10,000 per month for the next 66 months (the time it would have taken you to pay off your dream car).

How much money could you have invested instead of paying off your dream car?

Assuming you invested in Franc’s Equity Fund, Satrix 40 ETF, which has enjoyed 12-15% over 5-10 year periods historically. You’d likely be a millionaire!

So that’s the deal. Either you can buy your dream car or you can be a millionaire - you choose!